Temu has launched “all the meat on the grill” with offers and promotions on social networks, following Shein’s strategy. Personally, until recently I was not familiar with any of them, but not knowing them today seems impossible.
In the case of Temu, the platform belonging to the Chinese group PDD Holdings, tripled its profits in the January-March 2024 quarter, reaching almost 28 billion yuan, that is, about $3.8 billion. For reference, the previous figure is equivalent to 64 times Falabella’s profit in a similar period. The holding company to which Temu belongs is worth almost US$150 billion, competing neck and neck with Alibaba. For reference, the figure is equivalent to more than 19 times the value of Falabella’s stock market assets.
At the end of last year, Temu was already emerging as one of the international platforms most used by Chileans to make purchases. lto National Chamber of Commerce (CNC) noted that, as of December 2023, Temu is only surpassed by Aliexpress, Shein and Amazon.
What is Temu’s strategy? Temu is an online store that offers almost all types of products, at considerably low prices, directly, without intermediaries. So, for example, on its platform you can find footwear, clothing, jewelry, technology, household items, furniture, construction items and personal hygiene products, among many others… at prices that are sometimes ridiculously low. Thus, it is not unusual to find a dress for less than US$10 or a smart watch for a price that does not exceed US$20.
Yes, I know what you are going to tell me: the quality is not the best and well-known brands are not listed in their catalogs; There are also accusations of labor exploitation and/or precarious working conditions… but, how long do you think it will take for this problem to be solved? Or, in other words, by solving these problems, the implications that I will discuss below remain intact.
Beyond commenting on the strategy of marketing, The purpose of this column is to focus on its economic support and the serious consequences that this has for many current participants-offers, but positive for consumers. Temu – and equivalent companies – can sell at a very low price by optimizing its production in China, sell online without intermediaries, ignoring the additional costs involved in selling in physical stores or on platforms already established in the West, and focus on the logistics involved. a “reasonable” delivery time. Well, from an economic point of view, this type of electronic commerce – particularly Chinese – supported by artificial intelligence, constitutes a new production function, which is here to stay and continue to be perfected according to technological advances and labor regulations.
Any new production function, by definition, is more efficient than the old production function. In the case of retailalthough this new production function does not completely replace (at least in the short and medium term) the old production function, it does make it quasi-obsolete and forces the old participants to “adapt”, creating a model hybrid that mixes the old with the new, a kind of “Frankenstein” of production function. This is what he has tried to do, for example, Falabella. I refer to Falabella for being the main actor of the retail in Chile, and that sets the tone for the rest. But the problem for him retail Falabella type is that the long-term price signal that the new production function is giving makes it difficult for them to cover the heavy backpack of fixed costs that they have, given the excess of, let’s put it this way, “reinforced concrete” and administration expenses that they have. . If we add financial expenses to that… Houston, we have a problem.
In fact, Falabella has its retail dying a long time ago. Its source of profits is the financial business. Use the retail to enhance your financial business. I have already written enough about this. But I only highlight two points: a) the retailers Those who do not have a financial business are in a worse position to face this threat (sorry, it is no longer a threat, it is real competition) and, b) traditional banks cannot compete in this profitable segment of purchases with consumer loans at high rates, as not having “shoes, shirts or televisions” to sell jointly and even tied together. In both cases, Falabella has known how to take advantage the leg that has in both worlds and extract the best from each.
But the business of retail financial, which has been the cash cow giving juicy profits, also has problems. The first is that said source of profits is based on extranormal returns generated in a market with imperfections. Considering only traditional banking, there is no real competition in consumer loans to people. The mere existence of several Maximum Conventional Rates is a reflection of the above. The high ROE of the bank is another symptom of little competition. If we add to the above that the traditional banking oligopoly has entry barriers to offering consumer loans in the retailthere is a kind of “imperfection upon imperfection” that sustains Falabella’s financial business.
The conclusion of this diagnosis is stark and inevitable. In equilibrium – understood as a market that converges towards a situation of real competition that is increasingly refined or perfected, and with an efficient production function -, no current “Frankenstein” will survive without another even greater surgery, this will imply that the physical stores and malls In general, they will have to convert to a totally new business model, to adapt to lower margins given by equilibrium price signals. Not everyone will survive. There will be bankruptcies, mergers and acquisitions… and stock prices that will plummet.
And what does Banco Chile have to do with all this? A lot. I cite Banco Chile as an example for being the main national bank, but this applies to all participants. What will happen when a Temu or a Shein”they get involved” in the financial business? We return to the same thing: new signals of equilibrium prices, global competition in integrated markets, lower margins… good news for consumers; warning sign for bidders.
The above applies to many services – education, pension administration, among others – in which new production functions supported by artificial intelligence make it possible to dispense with heavy fixed cost structures. It’s the magic of creative destruction.
A second derivative of this new production function is to significantly alter the replacement cost of current companies. And by altering the replacement cost, business values and economic assets consequently decrease. In favor of the transparency and efficiency of the capital market, as well as protection for minority shareholders (you and I are indirectly through the AFPs), the CMF should request that the Board of Directors of each publicly traded company express its opinion. reasoned in the Annual Report regarding 2 questions: a) What is the estimated replacement cost of the company, understood as the cost of making the same company from scratch, but with a modern production function, which minimizes the cost structure fixed? b) What economic justification, in the opinion of the Board of Directors, is there for the resulting difference between the replacement cost and its current stock market value?
